Wednesday, 17 October 2012

The World’s Soundest Ponzi Scheme

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Can Social Security, which is on a steepening glide path toward insolvency, be described as “structurally sound?”

According to President Obama, the answer is yes – and I think Obama,
like most of his fellow Democrats, believes it. Most Republicans do not,
but since saying so puts the onus on them to say exactly what they
would do about it (always a politically dicey exercise), they tend not
to talk too much about it at all.
I thought the contrast was one of the most illustrative points to
come out of this week’s presidential debate between Obama and his
challenger, Mitt Romney.

Setting aside assessments about who “won” or “lost” the debate (and there was a remarkable consensus
that Romney outperformed Obama), the president, intentionally or
otherwise, clearly illustrated the differences in the two sides’
approaches to entitlement reform. Democrats see Social Security as a
social contract in which each generation assumes responsibility to
provide for the one that came before it. Republicans see Social Security
as both an empty promise and an unfair obligation that older
generations seek to foist upon their children and grandchildren.

So I believe the president meant it when he said
“Social Security is structurally sound. It’s going to have to be
tweaked the way it was by Ronald Reagan and Democratic Speaker Tip
O’Neill. But […] the basic structure is sound.”

He was talking about the Reagan-era National Commission on Social Security Reform,
headed by Alan Greenspan, who later became a household name as chairman
of the Federal Reserve. The commission’s approach was to gradually
raise the retirement age from 65 to 67, to increase the self-employment
tax and allow for partial taxation of benefits to upper income retirees,
and to expand Social Security’s coverage (and, more importantly, its
income from payroll taxes) to include federal civilian and nonprofit
organization employees. These are the sort of tweaks that, presumably,
the president has in mind for the future.
In reality, Social Security is an unfunded promise, despite the
accounting gimmick of a having its own trust fund. Taxes paid by today’s
workers are used to cover the benefits of today’s retirees. The
government is not putting aside any of the taxes that today’s workers
pay to fund their own future benefits.
From Obama’s point of view, this state of affairs is not a problem in
and of itself, because Social Security’s struggles are, to him,
fundamentally a function of its social obligation. Today’s younger
workers are taking care of their parents; in turn, their children (many
of whom are, as yet, unborn) will one day take care of them.

Unfortunately, the math on this theory doesn’t work, as the Social Security trustees point out regularly. In their yearly report
this spring, the Board of Trustees announced that the combined trust
funds are currently projected to run out in 2033. Most 2012 college
graduates will be in their early 40s then. The new deadline is three
years sooner than the one the trustees predicted in last year’s report.
But Obama wants to rely on tweaks to keep Social Security afloat.
Doing so will inevitably mean today’s young workers will retire later
and pay higher taxes in order to cover the government’s promises. The
trustees say that, after 2033, the program’s income will cover about 75
percent of promised benefits. The extra 25 percent will have to come
from workers in the form of higher taxes, retirees in the form of lower
benefits, or both.

For Republicans, rather than a fundamentally sound plan that faces
social problems, Social Security is an inter-generational Ponzi scheme.
What happens if today’s workers don’t have enough children? Or if those
children don’t have enough jobs? Or if those jobs don’t pay enough to
support the promised benefits for long-lived baby boomers then still
collecting their checks, let alone for the Gen Xers and millennials
eventually retiring behind them?

During the same debate, Romney said that the country’s deficit is “a
moral issue.” He meant that it is not only impractical, but immoral for
today’s older adults to leave their children with tens of trillions of
dollars in federal debt and, at the same time, to refuse to fix Social
Security in any way that would make the program self-sustaining – or,
alternately, to take the plunge and make it the welfare program in name
that it always has been in practice.

For the second year in a row, Social Security benefit payouts have exceeded the program’s income through tax revenue, thanks to the temporary cut in the FICA tax.
The government only “balances” the program with fictitious interest,
which is really just a pile of governmental IOUs. Those IOUs are not
very useful when it comes time to pay benefits to retirees who expect
them. The gap between today’s FICA tax receipts and today’s retirement
benefit payments is being plugged by money that the Treasury is
borrowing, mostly from foreign countries and the Federal Reserve.

To Obama and his party, Social Security can never go broke, and hence
it is fundamentally sound. His generation (which is also mine) has paid
for our parents’ retirement; our children can be counted upon to pay
for ours. If such reciprocity doesn’t actually work, just tweak it.
Their theory is that with enough tweaks, Social Security can continue to
be the most structurally sound Ponzi scheme in the world.